The liquidated damages clause: Red card

Penalties are out. No, that’s not a hand-me-down from Sepp Blatter; it’s not more faffing around by Fifa. It’s about building - I think.

Look, when you are mulling over the idea of building or digging works, you have a glint in your eye. You know that there is a real chance that the builder or digger will not finish by the date agreed in the contract. And your excitement builds at the idea of smacking the builder with a penalty, a fine, a sort of gotcha discount.

Then you talk to a building lawyer and the spoilsport punctures your balloon with a rule in English law: you and the builder can’t agree a late completion “penalty”. How come? What happened to “freedom to contract”? Are consenting adults not allowed to contractually consent to a penalty? No. In any case “freedom to contract” is a myth.

Now then, the joint winner of last year’s Society of Construction Law essay competition was Matthew Bell, lecturer and co-director of construction law studies at Melbourne Law School. He says it is high time that the consequences of finishing late frightened the pants off you … that is, place you in “terrorem”. He wants the liquidated damages clause (LAD) for late completion to be a penalty clause too.

He says this namby-pamby rule of limiting the consequences of late completion by the contractors to a reasonably accurate “pre-estimate” of actual loss “has outlived its usefulness”. Did I hear someone say, “dream on sonny”?

The law relating to penalty clauses is a bit out of the ordinary. Enough to say that an adjudicator, arbitrator or judge who detects a late completion money figure per day/week/whatever in a building contract will be obliged to strike it down if it is penal. The rule is more than 200-years old. Older than Melbourne. The late completion LAD clause asks that the monetary value be a fair assessment of the consequences of not hitting the date - say, two years - and not getting any extension of time or a lower cap. The whole idea is to invite the contractor to price the risk at bid stage and allow in his price for the LAD amount. Well, try asking the bidders in your next tender for two prices: one with £45,000 per week LAD and the other without.

What Bell’s paper emphasises is that fathoming what is a fair lump of cash and what is a penalty has variable results, depending on your tribunal: I might boot the LAD clause out, another may say okay. He says it is high time to grow up. An agreed figure in the contract is the commercially agreed figure. Forget the later wrangling that goes on. The boys that build office blocks, motorways and sewerage works are big boys. Stop interfering. Let parties strike their own commercial deal and have the deal legally upheld. In any case, there is a real possibility that the pre-contract negotiation will reasonably arrive at an accommodation, such as: penalty versus price for the works. “Oh, you want a penalty clause do you? Well then here is my price for that risk.”

To be intellectual about this, Bell advocates for the jurisprudential foundation to be shifted. He is content to secure a purpose for a “damages” clause other than the due and proper performance of the contract.

Earlier, I said all this business of penalties was about building - “I think”. Look, the lawyers sometimes lose sight of what’s up.

I have long since held the suspicion that the liquidated damages clause for late completion is daft. It’s a loaded gun. That glint in the employer’s eye of £45k per week is a
lip-smacking target. And when he is fed up at the so-called end of the job, he will lean on his architect or engineer not to award an extension of time (that’s not a fib) and when the contractor is running late, the £45k a week may cause him to think. And when he does, he goes on the hunt to blame his subbies … all of them. Then he adds to the £45k LAD his own on-site costs of another £55k per week. Meanwhile, that LAD row will destroy his working relationship with the employer, architect, engineer, QS, subs and Uncle Tom. The LAD clause, that weekly money in building contracts, burns and burns. The only people who really love all this is guess who? The lawyers. Leave out LADs. Just leave the damages to be what they be.

Tony Bingham is a barrister and arbitrator at
3 Paper Buildings Temple
Follow Tony on Twitter @TonyBingham2